D. D. Escobar, G. Pflug
This paper examines different methods of pricing Forward contracts in Energy Markets. Due to non-storability and high volatility of energy, the Risk Premia of this contracts are widely studied. Classical analysis studies the difference between forward prices and expected values. As an alternative, we aim to find an appropriate method to price these contracts using the distortion and the certainty equivalence principles. It is well known that both methods price contracts with larger values than the expected value of Spot Prices. Although this is natural in insurance pricing, we have negative values of Risk Premia too. To represent this fact, we use concave functions in the Certainty Equivalence Principle. We estimate the distortion and disutility functions that explains better the market using future simulations of past data. Our data is from the EPEX SPOT and EEX markets. Prices are modelled with SARIMA models and we study empirically the Risk Premia for three months ahead.
Keywords: Certainty Equivalence principle, Distortion Principle, Energy markets, Insurance pricing, Risk-aversion, Risk-loving, Risk Premia, Time series.
Scheduled
WC2 Energy markets
June 1, 2016 12:00 PM
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